You pose an interesting question that does not have a clear answer. Before turning to the issue under discussion, I review some basic principles for the pedagogical benefit of other readers.
In the United States, "the power to enact statutes may only be exercised in accord with a single, finely wrought and exhaustively considered, procedure".
Clinton v. City of New York, 524 US 417, 439-40 (1998) (citation and internal quotation marks omitted). This procedure involves a bill passing both houses of Congress. US Constitution, Art I, § 7, cl 2. Notably, the IRS does not have a freestanding power to enact laws. Instead, "[
i]t is axiomatic that an administrative agency's power to promulgate legislative regulations is limited to the authority delegated by Congress".
Bowen v. Georgetown Univ Hospital, 488 US 204, 208 (1988). In exercise of its legislative power, Congress has delegated to the Secretary of the Treasury the power to, among other things, "prescribe all needful rules and regulations for the enforcement of" the Internal Revenue Code. 26 USC § 7805(a). However, this provision does not grant the Secretary or the IRS the power to amend statutes. "A regulation which ... operates to create a rule out of harmony with the statute is a mere nullity."
Manhattan General Equipment v. Commissioner, 297 US 129, 134 (1936) (internal comma omitted).
There is no such thing as "the IRS's
pro rata rule". The rule commonly referred to as the
pro rata rule is not an invention of the IRS, but rather is the result of an Act of Congress (discussed more below). Congress has dictated that the general rule is that distributions from an IRA are "included in gross income ... in the manner provided under section 72". 26 USC § 408(d)(1). The rule commonly referred to as the
pro rata rule is presently codified at 26 USC § 72(e)(8)(B). For the purpose of applying this latter provision, "all individual retirement plans shall be treated as 1 contract". 26 USC § 408(d)(2)(A). I will refer to this below as "the aggregation rule". Nothing in the statute clarifies which plans exactly fall within "all ... plans". In particular, there is nothing in the statute to clarify whether the "aggregation rule" captures inherited IRAs of which the taxpayer is the beneficiary but not the grantor (contributor). In view of this legislative ambiguity, we would turn to the regulations to see if they shed any light on this issue, but in this case, there are no relevant regulations.
Even Justice Scalia could not apply textualism to deduce the meaning of the "aggregation rule" because the literal meaning of the provision is absurd (i.e. it does not really apply to "all ... plans" in the world; it presumably only aggregates plans with some sort of connection to the taxpayer, even though no such qualification exists in the text). There are no textual indicia whatsoever in the statute to clarify what it means. Thus, I turn to the legislative history. In 1986, there were no income limits on deductible contributions to a traditional IRA when the taxpayer was an active participant in certain pension plans. These restrictions were introduced by § 1101 of the Tax Reform Act of 1986, PL 99-514, 100 Stat 2085, 2411-14 (Oct 22, 1986). To compensate for these new restrictions, Congress introduced the concept of designated nondeductible contributions to an IRA.
Id, § 1102(a), 100 Stat at 2414-15. This statute also introduced the "aggregation rule", which has not been modified in the intervening years.
Id, § 1102(c), 100 Stat at 2416 ("Treatment of Distributions").
The concept of nondeductible contributions and the "aggregation rule" made their way into the bill that became the Tax Reform Act of 1986 by way of a Senate amendment. The Finance Committee Report accompanying the Senate amendment states that, for the purpose of the IRA distribution rules, "all IRAs
of an individual are treated as one contract". Senate Committee on Finance,
Conference Report on the Tax Reform Act of 1986 (Sept 18, 1986), II-379 (emphasis added). Moreover, after the enactment of the Tax Reform Act of 1986, the staff of the US Congress Joint Committee on Taxation, consisting of members of Congress from both houses, prepared a document titled "
General Explanation of the Tax Reform Act of 1986", dated May 4, 1987 ("General Explanation"). This document explains the "aggregation rule" at pages 630-31. Because it was published after the enactment of the bill, this document "is not part of the legislative history although it is entitled to respect".
Redlark v. Commissioner, 106 TC 31, 45 (1996), rev'd without disagreement on this point 141 F3d 936 (9th Cir 1998). See also
Agro-Jal Farming Enterprises v. Commissioner, 145 TC No 5, at *18 n 8 (2015) (discussing the weight to be given to the General Explanation in light of comments by the Supreme Court in
United States v. Woods, 134 SCt 557 (2013)). The description in the General Explanation does not explicitly resolve the ambiguity in the "aggregation rule", but it appears to contemplate that the aggregation includes only IRAs to which the taxpayer has made a contribution:
| | The Act provides that, if an individual withdraws an amount from an IRA during a taxable year and the individual has previously made both deductible and nondeductible IRA contributions, then the amount includible in income for the taxable year is the portion of the amount withdrawn which bears the same ratio to the amount withdrawn for the taxable year as the individual's income on the contract (including all IRA contributions) bears to the value of the contract (including both deductible and nondeductible contributions).
|
General Explanation, at *631 (emphasis added).
This legislative history evidence suggests, but does not definitively prove, that the IRA aggregation rule does not apply to aggregate the taxpayer's IRAs with inherited IRAs to which the taxpayer has not made any contributions and is merely the beneficiary. I leave it up to you to draw whichever conclusion you feel is legally defensible.
